Skift Take

American Airlines has one of the world's most toxic management-labor relationships; one that can't be solved by bankruptcy restructuring or other window dressing.

A merger between bankrupt American Airlines and US Airways may not be inevitable, but something has to change at the Fort Worth carrier if it is going to survive, industry analysts say.

“The American we have been looking at over the last decade is not the American that’s going to emerge from this (bankruptcy) process,” said Jeffrey A. Kauffman, an airline industry analyst with Sterne Agee in New York. “In this industry, jogging in place leads to road kill.”

In its ninth month of bankruptcy reorganization, American parent AMR Corp. is evaluating its options, which include merging with another carrier — US Airways, JetBlue Airways, Alaska Airlines, Virgin America and Frontier Airlines are potential candidates — or flying as a stand-alone carrier.

American Airlines Baggage Belt at DFW Terminal D Photo i031 by Grant Wickes

American Airlines baggage belt at Dallas-Fort Worth. Photo by Grant Wickes.

Although American CEO Tom Horton believes the company can slash its legacy airline costs in bankruptcy and emerge to compete successfully with larger rivals United Airlines and Delta Air Lines, many who follow the industry are skeptical.

“AMR’s operating performance has not improved in bankruptcy as core operating margins remain under pressure,” said Vicki Bryan, senior analyst at Gimme Credit, an independent corporate bond research service. “AMR matched our estimates with its proposed $2 billion in cost savings, mostly from labor, but unless it improves the quality of revenue any cost structure cobbled together now will again most likely become too expensive.”

Bigger is better

Jamie Baker, who follows AMR for J.P. Morgan Chase & Co., said a tie-up with US Airways would provide AMR with US Airways’ Philadelphia and Charlotte, N.C., hubs and 33 new eastern U.S. cities that the Fort Worth carrier doesn’t presently serve.

“We are underwhelmed with AMR’s stand-alone restructuring plan, insofar as it fails to adequately address the decade-long marginalization of its domestic network,” Baker said. “AMR has fallen to fourth place in the largest non-hub eastern and western markets, though (it) maintains a number two rank in the west.

“Delta and United networks offer more to corporate travelers. We examined several smaller cities east of the Mississippi and in most examples found Delta and United offer several hub options. In AMR’s case, well, one can easily get to Chicago. For many, this is adequate if headed to California but insufficient if headed to most points in Asia, Europe or Latin America. While AMR hopes to dominate local hub markets, feed to/from said hubs appears lacking in our view.

“We believe this also explains its revenue deterioration and is unlikely to be addressed simply through American’s plans to dominate the local markets in JFK, Chicago, Dallas, Los Angeles and Miami. Furthermore, as United more fully integrates Continental’s network into its own, further share slippage at AMR is likely, in our view.”

Bigger is better in the airline industry today, analysts say.

The bigger the route network, the more extensive the partnerships in international alliances, the more likely the carrier will win the loyalty of business and leisure travelers, analysts say.

“American, as big as it is, would be a distant number three,” Kauffman said, “and it has lost some of its edge in frequencies, destinations and quality of fleet. Unless you have a niche no one else does, you need a network for the business traveler and the leisure traveler.

“As a stand-alone carrier, American would probably have to change from where they are today because they would continue to lose traffic to larger carriers. And, on the low end, they continue to get poached by smaller carriers.”

Analysts question whether Horton’s “cornerstone” strategy — emphasizing feed and increased flights at its Dallas/Fort Worth, Chicago, New York, Miami and Los Angeles hubs as gateways to lucrative international travel — will be sufficient to increase revenue by $1 billion a year.

Labor vs. management

The major challenge at AMR is internal, in the view of some industry observers.

AMR and American have the most bitter labor/management relations in the airline business, industry officials say.

Most observers believe employee morale turned sour after the wage and benefit concessions of 2003.

American’s 50,000 mechanics, pilots and flight attendants were persuaded under threat of an imminent bankruptcy filing in 2003 to accept $1.6 billion a year in wage and benefit cuts.

For American workers, including 5,600 mechanics and related work groups at American’s Tulsa maintenance base, that meant nearly 20 percent wage cuts, less vacation time and more weekend and holiday work.

American management sold the concessions with slogans such as “Shared sacrifices, shared rewards,” implying that down the road a healthier company would share equally the fruits of prosperity.

As it turned out, both the sacrifices and the rewards were one-sided.

While American workers struggled with longer hours for less pay, management was rewarded with millions of dollars a year in bonuses.

“American labor lost all confidence in American management,” said Robert Herbst, an industry analyst and founder of “The straw that broke the camel’s back was the 2005/2006 management bonuses when less than 100 management individuals received more than $300 million over two years. They tried to justify those obscene bonuses to labor when labor was taking large concessions.”

The effects of the concessions and the management bonuses were compounded by protracted contract negotiations that began in 2006.

The 2003 contracts became amendable in 2008, but management couldn’t reach agreements with the unions, and the process ended with AMR’s bankruptcy filing in November.

American’s workers are an unhappy crew, employees and observers said.

“It’s quite obvious when you get on an American plane that (flight attendants) are indifferent to your welfare,” said Fred Russell, CEO of Fredric E. Russell Investment Management Co. in Tulsa. “I don’t care if they have new planes or not. If you are in a service industry and you aren’t happy, it’s not going to work.”

Those who believe a merger is American’s best long-term strategy say it would strengthen American where it is weakest and cure the labor/management rift, assuming a new management team would take control.

Virgin America?

AMR executives, in collaboration with the creditors committee in its bankruptcy case, has developed a non-disclosure agreement the company is sending to US Airways and other potential merger partners. The agreement will allow the parties access to confidential information to objectively evaluate strategic alternatives, AMR executives said.

Although he thinks a US Airways/AMR merger is most logical, Jake Dollarhide, CEO of Longbow Asset Management Co. in Tulsa, said he is intrigued by a potential marriage between AMR and Virgin America.

“Virgin America is privately held, well-funded with deep pockets,” Dollarhide said. “They only have 30 routes around the world.”

But it is US Airways that many analysts return to after considering alternatives.

“US Airways has the small town (East Coast and Midwest) network that can bring in (passenger) feed,” Sterne Agee’s Kauffman said. “Both carriers would face a better future as a consolidated entity. US Airways could bring traffic and flow back to an American network that has lost traffic and flow.

“On the other hand, it would solve US Airways’ niche of being a connecting carrier, with exposure in Asia and Europe.”

Herbst, the industry analyst, said the revenue of United and Delta are now 45 percent to 60 percent larger than American’s.

“Combining the revenues of American and US Airways would move the merged carriers to the top of the largest airline in the world list,” Herbst said. “The industry has changed so much because of consolidation that there is no way a small carrier, which American has become, can compete with Delta and United.

“American will be able to survive as a stand-alone carrier but only for a few years, and then they will be right back where they are now.”

(c)2012 Tulsa World (Tulsa, Okla.). Distributed by MCT Information Services. 


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